Archives of “behavioral economics” tag

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Misbehaving: The Making of Behavioral Economics-Book Review

  
  Education
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MISBEHAVING-ASRBehavioral economics is now mainstream, at least outside of the stodgiest of economics departments. In fact, as the author writes, “This maturation of the field is so advanced that when this book is published in 2015, barring impeachment, I will be in the midst of a year serving as the president of the American Economic Association, and Robert Shiller will be my successor. The lunatics are running the asylum!” (p. 335) How behavioral economics got to this point from its humble, academically risky beginnings in the 1970s is the subject of Richard H. Thaler’s Misbehaving: The Making of Behavioral Economics (W. W. Norton, 2015).

Traditional economics studies rational agents, whom Thaler calls Econs; behavioral economics studies Humans. Econs are a construct designed to fit a theory; Humans are real people whose often irrational activities provide data (supposedly irrelevant factors) for study and hypothesis formation.

Thaler’s book, a personal history of the struggles and triumphs of behavioral economics, is also a wonderful introduction to the field. It recounts study after study that show just how predictably error-prone people are. And it explains how businesses can use these findings to keep customers happy and how governments can use them for the public good.

Looking back, Thaler suggests that the area where behavioral economics has had its greatest impact is in finance. “No one would have predicted that in 1980. In fact, it was unthinkable, because economists knew that financial markets were the most efficient of all markets, the places where arbitrage was easiest, and thus the domain in which misbehaving was least likely to appear.“ And yet these markets exhibited tell-tale anomalies, for instance the storied case of Palm and 3Com. Moreover, he notes, “It also didn’t hurt that financial markets offer the best opportunities to make money if markets are misbehaving, so a lot of intellectual resources have gone into investigating possible profitable investment strategies.” (p. 346)

The area where it has had the least impact so far is macroeconomics. In part, at least, this is due to the fact that the field “lacks the two key ingredients that contributed to the success of behavioral finance: the theories do not make easily falsifiable predictions, and the data are relatively scarce.” (p. 337)

Misbehaving is a thoroughly enjoyable read, not quite right for the beach but perfect for a rainy Sunday afternoon.

The Difference Between A Good And A Bad Trader: What Brain Imaging Reveals

  
  Education
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The age old question: what is the difference between a good trader and a bad trader… aside from the P&L at the end of the day of course.

While luck has always been a major component of the equation, figuring out just what makes one trader successful, while another blows all his funds on a trade gone horribly bad has always been the holy grail of behavioral finance. Because if one can isolate what makes a good trader “ticks, that something can then be bottled, packaged and resold at a massive markup (and thus, another good trade) in the process making everyone the functional equivalent of Warren Buffett.

Or so the myth goes. Alas, the distinction between the world’s only two types of traders has been a very vague one.

Until now. (more…)

The Illusion of Skill

  
  Education
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“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [financial] industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.”

I find that, unfortunately, to be terribly true.

For those of you who may be unfamiliar with Kahneman, he is a professor at Princeton and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, and behavioral economics.

Daniel Kahneman: The riddle of experience vs. memory -VIDEO

  
Education, Video
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Using examples from vacations to colonoscopies, Nobel laureate and founder of behavioral economics Daniel Kahneman reveals how our “experiencing selves” and our “remembering selves” perceive happiness differently. This new insight has profound implications for economics, public policy — and our own self-awareness

 

MRI’s of Succesful Traders

  
  Education
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I’ve seen this study making the rounds on several websites now as a type of neuroeconomic confirmation of Buffetological principles…

Perhaps procedure might be slightly useful as a means of seeing physical brain improvement by training– such as that found through meditative practices.

“Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.”

“Neuroeconomists Confirm Warren Buffet’s Wisdom”: (more…)

MRI’s of Succesful Traders

  
  Education
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I’ve seen this study making the rounds on several websites now as a type of neuroeconomic confirmation of Buffetological principles…

Perhaps procedure might be slightly useful as a means of seeing physical brain improvement by training– such as that found through meditative practices.

“Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.”

“Neuroeconomists Confirm Warren Buffet’s Wisdom”:

“Seeing what’s going on in people’s brains when they are trading suggests that Buffett was right on target,” says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech.

That is because in their experimental markets, Camerer and his colleagues found two distinct types of activity in the brains of participants—one that made a small fraction of participants nervous and prompted them to sell their experimental shares even as prices were on the rise, and another that was much more common and made traders behave in a greedy way, buying aggressively during the bubble and even after the peak. The lucky few who received the early warning signal got out of the market early, ultimately causing the bubble to burst, and earned the most money. The others displayed what former Federal Reserve chairman Alan Greenspan called “irrational exuberance” and lost their proverbial shirts.

10 Behavioral Economics/Psychology Books for Investors

  
Analysis, Education
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As a species, we are notoriously bad at understanding our own thinking and emotions. We are even worse at predicting our own behavior. Understanding your own mind and those of your fellow investors is crucial to successful investing.
These books will go a long way to helping you understand your hardwired weaknesses and blind spots.
 
1. How We Know What Isn’t So by Thomas Gilovich
Thomas Gilovich: How We Know What Isn't So
Published in 1991, this was the very first behavioral finance book I ever read — it is also one of the most influential investing books you will ever read. So many of our own foibles are detailed here that it is almost embarrassing. Everything from unsuspected biases to how we engage in critical reasoning comes under scrutiny. What it reveals isn’t pretty. Despite the genius that is human achievement, it turns out that we are all very poor at comprehending complex data and analyzing risk.
This book will help you understand how your brain processes randomness; overlooks evidence that is inapposite to prior beliefs; selectively perceives and reinterprets data; and engages in selective recall. It’s how we all create an artificial story line to help make sense of otherwise incomprehensible data.
Once you finish this book, you will never look at investing the same way.
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2.  Thinking, Fast and Slow (Daniel Kahneman)

Daniel Kahneman, a Psychologist, won the 2002 Nobel Prize in Economic Sciences with Amos Tversky for their seminal work in behavioral finance. The two challenged the idea of Homo Economicus and the rational model of judgment and decision making.
Thinking, Fast and Slow  looks at the two systems of Human Cognition: System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. The book exposes the extraordinary capabilities along with the faults and biases of our wetware. This book will transform the way you think about thinking.
The most recent and comprehensive book from a giant in the field.

(more…)

Thoughts on The Psychology of Speculation by Henry Howard Hopper

  
  Education
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Thoughts on the Psychology of Speculation by Henry Howard Hopper published in 1926 and then reprinted by Fraser Publishing Company.

The book is excellent on many different levels. I like most that it talks about encompassing principles of human nature. Not the trivial made up ones of behavioral economics but broad human tendencies that are crucial to how we make our decisions and go about living our life.

Included among these broad human tendencies is the tendency to go crazy when you see a massive flow in front of you like the many who commit suicide in Niagara falls after seeing the water flow and the many who lose their minds as the market goes up. Also paramount is the incredible ennui that a human feels when something that he formerly owned goes thru the roof in other hands. I also like the many market periods of boom and bust he covers including the fantastic bull market of 1915 in the middle of the war where stocks of many a sage speculator was short skyrocketed by 15 fold or more. “He did not live to see General Motors at 850 on October 25, 1916,” as his broker was forced to sell him out well before hand and “he had crossed the bar into the great beyond”.

Like my father’s experience in the Bowerey where he had to cart the bodies away when they couldn’t pay the rent after dying from gambling, “the widow was left almost penniless and he was buried at the expense of the lodge”. I like also the colorful vivid language so characteristic of the roaring 20s that makes on wish one was there and feel for the every emotion that he elicits.

I like best the last words he repeats of a short seller who made a fortune in leather goods and then lost it in the market through shorting. “In the past year I’ve suffered every torment known to the demons of hell. My only grain of comfort is that it’s all over now and I have nothing more to lose.” From this tragic experience, the author concludes “there is but little comfort or profit to be gained on the short side of a protracted bull market”. (more…)

22- Books Everyone Should Read on Psychology and Behavioral Economics

  
  Education
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In no order and with no attribution:

  1. Risk Savvy: How to Make Good Decisions by Gerd Gigerenzer
  2. The Righteous Mind: Why Good People Are Divided by Politics and Religion by Jonathan Haidt
  3. The Checklist Manifesto: How to Get Things Right by Atul Gawande
  4. The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank
  5. David and Goliath: Underdogs, Misfits, and the Art of Battling Giants by Malcolm Gladwell
  6. Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely
  7. Thinking, Fast and Slow by Daniel Kahneman
  8. The Folly of Fools: The Logic of Deceit and Self-Deception in Human Lifeby Robert Trivers
  9. The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust by John Coates
  10. Adapt: Why Success Always Starts with Failure by Tim Harford
  11. The Lessons of History by Will & Ariel Durant
  12. Poor Charlie’s Almanack
  13. Passions Within Reason: The Strategic Role of the Emotions by Robert H. Frank
  14. The Signal and the Noise: Why So Many Predictions Fail–but Some Don’tby Nate Silver
  15. Sex at Dawn: How We Mate, Why We Stray, and What It Means for Modern Relationships by Christopher Ryan & Cacilda Jetha
  16. The Red Queen: Sex and the Evolution of Human Nature by Matt Ridley
  17. Introducing Evolutionary Psychology by Dylan Evans & Oscar Zarate
  18. Filters Against Folly: How To Survive Despite Economists, Ecologists, and the Merely Eloquent by Garrett Hardin
  19. Games of Strategy (Fourth Edition) by Avinash Dixit, Susan Skeath & David H. Reiley, Jr.
  20. The Theory of Political Coalitions by William H. Riker
  21. The Evolution of War and its Cognitive Foundations (PDF) by John Tooby & Leda Cosmides.
  22. Fight the Power: Lanchester’s Laws of Combat in Human Evolution by Dominic D.P. Johnson & Niall J. MacKay.
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